Saturday, January 9, 2016

Saving the world one state or province at a time: a look at existing carbon-pricing schemes in North America

With the Paris climate accord in place, now comes the hard work of actually implementing emissions reductions goals to, well, save civilization. There are many, moving parts to making this work; one of the largest set of which involve putting a price on emitting carbon.

There are two major ways to do this: cap-and-trade program, and a direct carbon tax. Cap and Trade sets a total cap on emissions for regulated sectors then lets enitities purchase emissions credits they can cash in for their emissions or sell on a secondary market if they don't exceed their cuts. Carbon taxes, in contrast, directly place a levy on carbon emissions from regulated sources. Both have their supporters and detractors, and I'm not going to wade into that debate here (personally, I'd support a well-designed plan of either).

Follow me below the fold for a brief look at the carbon-pricing landscape in North America. I don't have detailed looks at the programs (though I do link to formal reports that detail each of the existing or proposed programs). What this should serve as is a basic lay of the land and give an idea of how these already successful programs lay an extremely important groundwork for the deeper emission cuts that will need to come.

The United States and Canada now have three major regional cap-and-trade carbon control plans operating in California (online 2013), Quebec (2014) and a limited one in nine northeastern States called the Regional Greenhouse Gas Initiative or RGGI (2009). There is one regional carbon tax plan in effect in British Columbia (2008).

Additionally, there are two more comprehensive plans slated to come online over the next 12 months in the Canadian provinces of Ontario (see here as well) and Alberta. The former is the most populous and largest economy in Canada, and the latter province is both the largest greenhouse gas emitter in both absolute and per-capita terms.

Will these existing cap-and-trade and carbon tax systems save the world in and of themselves? In a word, no. But if a journey of 500 miles begins with a single step, these six programs have got us jogging steadily down the highway to a low-emissions future by making several important contributions:

1. They actually do provide for real emissions cuts against a "business-as-usual" scenario and in most cases actually provide cuts over today's emissions. Alberta's plan on the surface simply caps its emissions, but considering the expansion of its fossil fuels industry, especially the dirty tar sands, this cap in and of itself is impressive. The other four plans do result in reductions from current levels of emissions. California's cap and trade market, for example, mandates a roughly 20 percent reduction from 2012 levels of emissions (about 430 megatons), which the state is on track to meet. BC's plan has resulted in a 15 percent reduction of gasoline usage in comparison to the rest of Canada (and a 16 percent absolute drop), with the attendant emission reductions. The RGGI is on track to reduce emissions from the electrical power sector from 91 megatons of CO2 equivalent to 78 megatons (a roughly 15 percent cut). Overall, each of these programs is probably slated to pull between 10-100 million tons of carbon out of the environment annually by 2020. That's a modest reduction set up against the roughly 6 billion tons the US and Canada currently emit, but it's not nothing either.

2. They show emission cuts can be done for reasonable costs (see table 6). The mere fact that these programs exist, lower carbon emissions, and haven't cratered economies is very useful marker to defeat naysayers and help get cautious policymakers off the fence and on board the carbon reduction train.

3. They work out bugs. As newer programs, each of these reduction schemes will meet some obstacles. For example, the RGGI's most serious problem was that it overestimated the baseline number of carbon emissions for 2009 before the economic crash. As a result, the market for credits crashed. What saved the program's marginal effectiveness was a minimum price for emissions credits, that functioned essentially like a carbon tax. The RGGI principals also learned from the problems: they lowered the baseline number of credits and jacked up the minimum price of a credit, tightening the program and engaging more stringent emissions control.

4. They can be ramped up. As the programs come on line and start working, they can be stepped up -- indeed they already have been. BC's program started with a tax of $10 (Canadian) a ton in 2008, and worked its way up to $30 a ton in 2012. California and Quebec's Cap and Trade plans started with a floor of $10US (which is the minimum bid) at the first auction and that floor has increased to $12.10 in 2015, and will increase by incremental amounts every year. Emissions have been trading slightly above that. The floor for emissions is lower in the RGGI, but trading prices have increased steadily since 2013 as the economy has recovered, reaching $5.50 a ton in the last auction of 2014. They can also cover more sectors. California's plan started by merely covering major emitters in the power and industrial sector in 2013 (a bit under 40 percent of the state's emissions), but expanded to cover transportation in 2015 (covering 80 percent of emissions).

5. They build confidence. When a program comes on and starts working, it signals a seriousness that shows other actors that the first actor is acting in good faith and can be trusted. Over time, this can create a virtuous circle of mutual-reinforcing actions that are necessary to reduce global emissions to safer levels. The Paris agreement itself is an example of this feature -- countries see that other countries are willing to make pledges and pledge something themselves. Once pledges start to get met, mutual confidence builds and countries commit to a more stringent level of cuts. Alberta's planners in particular (see page 12 of this report) have noted that their current plan can easily be ramped up to match greater cuts in other places.

6. They can be expanded across other jurisdictions. We've already seen this. As California's program has come on line, Quebec has linked its system with California's in a unified market, with the likelihood that Ontario and Manitoba might join later. Larger jurisdictions -- even across international borders -- allow for programs to maximize their reach and increase efficient allocation of carbon credits to areas that need a bit more help transitioning, or are reliant on fossil fuels in exchange for rewarding areas that are ahead of schedule with cash. This is Economics 101.

7. Many of these plans leverage their income to further reduce emissions. The BC carbon tax is strictly revenue neutral, being used to lower personal income and business taxes (with emphasis on relief for lower and middle-income residents as well as on smaller businesses). But other plans aren't. Take the RGGI for example, which distributes proceeds from emissions credit sales to its constituent states, many of whom plow that money back into energy efficiency. California mandates by law that its emissions sales proceeds get invested in activities that further boost the environment. Over the last two years, these have manifested themselves in improvements in energy efficiency for government and commercial buildings, affordable housing near transit and better transportation.

As Dave Roberts over at Vox points out, sometimes the best parts about these plans is that they aren't revenue neutral because they do fund many worthwhile activities that help ease the transition into the new tax regime and further improve the environment.

So where does this leave us? We've still got a long way to go to decarbonize the environment. But take heart -- as these expanding carbon pricing programs show, we've got much of basic infrastructure in place and already operating to be successful.